FSL – DBS

Market conditions suited for lowerrisk investments

First Ship Lease Trust (FSLT) is a business trust formed to own and lease vessels on an exclusively bareboat charter basis. Its policy is to distribute 100% of available cashflows which are tax-exempt to all classes of investors.

Dividend paying with growth. FSLT has grown its fleet since IPO – from 13 vessels to 23 by end Oct 08. Its portfolio is diversified across eight customers and five shipping subsectors. Regular and stable distributions is the basis for the trust and growth will come from accretive acquisitions. YTD, FSLT has already acquired vessels worth US$350m (incl the third Yang Ming vessel), ahead of its acquisition target of US$300m for 2008.

Positioned to exploit opportunities. FSLT is well positioned in the global ship finance market, estimated at US$75bn pa. There is no conflict with potential lessees as Trustee-Manager, FSLTM, does not engage in ship operating activities. Shipping cycle volatility is mitigated by its staggered lease expiry profile with the earliest maturity in 2014, an average remaining lease period of approximately 9.2 years and a diversified vessel portfolio as sub-sector shipping cycles are usually countercyclical to each other. FSLT signs bareboat leases rather than time charters, and is not exposed to operational costs (such as fuel, crew-related expenses) and risks.

Risks. Its single largest risk is the credit risk associated with its lessee base. This is minimized as all vessels are leased to international operators and payable monthly. Near term opportunities for acquisitions is probably limited given that FSLT has marginally exceeded its targeted capital ratio and the weak equity markets.

Initiate with a Buy, TP S$1.65. We believe that FSLT’s yield spread versus the US peers is unjustified. FSLT is offering a yield of 12.7% and 13.7% in FY08-09 and is trading at a P/B of 1.1x. For comparison, US peers are trading at yields of 9.1% and 9.5% for FY08-09 respectively; and at a P/B of 3.1x. TP of S$1.65 pegged at a target return of 9.4%, the average of the US and Singapore peers.